The Political Economy of the World Trading System: From GATT to WTO

by Bernard M. Hoekman

The principle of nondiscrimination has two components, the MFN rule and the natio...

The MFN rule requires that a product made in one member country be treated no less favourably than a `like' (very similar) good t...

However, exceptions are made for the formation of free trade areas or customs unions and preferential tre...

It ensures that deals that are struck between two countries to lower tariffs are not `undone' subsequently by one of the parties offe...

It provides insurance against so-called concession diversion (Schwartz and Syk...

Most favoured nation also reduces overall negoti...

Most favoured nation therefore helps in the enforcement of multilateral rules by raising the costs to a country of defecting from the trade regime to which it committed itself in an earlier MTN

The national treatment rule is the second leg of the nondiscrimination principle. It requires that foreign goods-once they have satisfied whatever border measures apply-be treated no less favourably than like or directly competitive goods produced domestically in terms of internal (indirect) taxation (Article III: 2 GATT).

The potential reach of the national treatment provisions in WTO agreements is far-reaching: they span virtually all governmental policies that affect the conditions for sale and distribution, widely interp...

Moreover, the rule is not limited to explicitly discriminatory measures, but also spans any policy that indirectly has the effec...

World Trade Organization members are required to publish their trade regulations, to establish and maintain institutions allowing for the review of administrative decisions affecting trade, to respond to requests for information by other members, and to notify changes in trade policies to the WTO.

Broda, Limao and Weinstein (20o6) provide evidence that countries that are not bound by the GATT/WTO systematically set higher tariffs on goods that are supplied inelastically, and that those that can affect the terms of trade do indeed levy higher tariffs, as predicted by the theory.

In related work, Saggi (2009) concludes that adoption of MFN by a country hurts the smaller exporter to its market while benefitting the larger one. Thus, the application of MFN by a country does not necessarily benefit all of its trading partners.

The tariff commitments made by WTO members in a MTN and upon accession are enumerated in schedules (lists) of concessions. These schedules establish so-called ceiling bindings-the member concerned cannot raise tariffs above bound levels without negotiating compensation with the principal suppliers of the products concerned.

Once tariff commitments are bound, it is important that other, nontariff, measures that can hollow out the value of the tariff concession are not used.

A number of GATT provisions, including a ban on the use of quantitative restrictions on imports and exports and the rules on subs...

A final principle characterizing the WTO is flexibility. This manifests itself in a number of forms. One is that governments may, if they desire, re-impose trade restrictions in specified circumstances. There are three types of provisions in this connection: articles allowing for the use of trade measures to attain noneconomic objectives, articles aimed at ensuring `fair competition', and provisions allowing for intervention in trade for economic reasons.

The first include provisions allowing for policies to protect public health or national security, and to protect industries that are seriously injured by competition from imports.

The second type of measures include the right to impose countervailing duties on imports that have been subsidized and antidumping duties on imports that have been dumped-sold at a pr...

Finally, the third type of `safety valve' allows for actions to be taken if there are serious balance-of-payments difficulties, or if a governmen...

A fundamental perception of the founders of the GATT was that multilateral institutions facilitating cooperation between countries were important not only for economic reasons, but also that the resulting increase in interdependence between countries would help to reduce the risk of war (Meade, 1940; Hull, 1948; Penrose, 1953; Hirschman, 1969).

The negotiations on the charter of such an organization, although concluded successfully in Havana in 1948, did not lead to the establishment of the ITO because the US Congress was expected to refuse to ratify the agreement.

Until the Uruguay Round, effectively no progress was made on liberalization of trade in agricultural products and textiles and clothing. The deal that finally subjected these sectors to multilateral disciplines included agreement on the creation of the GATS, TRIPS and the WTO itself.

The WTO continues to operate by consensus and continues to be member-driven. However, a number of major changes did occur. Most obviously, the coverage of the WTO is much greater. Moreover, in contrast to the old GATT, the WTO agreement is much more of a `single undertaking'-most of its provisions apply to all members. Thus, the WTO has many more implications for developing countries than did the GATT, where participation was more a la carte as well as being limited to trade in goods. In the dispute settlement area, the process became more `legalistic' with the creation of a standing Appellate Body. Finally, much greater transparency and surveillance functions were granted to the secretariat through the creation of the Trade Policy Review Mechanism.

Over time the agenda of MTNs grew to include various nontariff policies.

In OECD countries, tariffs on agricultural products are a multiple of those applied to manufactures, and within manufacturing, there are tariff peaks exceeding 15 per cent on many

labour-intensive products in which developing countries have a co...

The Overall Trade Restrictiveness Index (OTRI) is defined and calculated as the uniform tariff equivalent of observed policies on a country's imports. That is, they represent the tariff that would be needed to generate the actual level of trade reported for a country in 20o6.

The data reveal that there is still a significant tariff negotiating agenda confronting WTO members, especially in agriculture, but that NTMs account for a major share of the overall level of trade restrictiveness.

Agreeing on the elimination or reduction of NTMs is more difficult than negotiating downward the levels of tariffs. One reason for this is that it is much less obvious that specific NTMs are detrimental to a country's welfare.

The explosion of grey area measures, especially voluntary export restraints (VERs), constituted a major challenge to the system, but as discussed at greater length in subsequent chapters, VERs emerged in large part because of GATT disciplines on the use of emergency protection.

Many of the trade disputes and the recourse to NTMs that emerged in the 198os were in part a reflection of what Bhagwati (i99i) has called the diminished giant syndrome of the US.

At Punta del Este it had been agreed that the negotiations were to be a `single undertaking'. With the proposal to create the WTO, the concept of a single undertaking was redefined to mean that all GATT contracting parties had to become a WTO member. There was no alternative-remaining a member of GATT 1947 would have no value given that it was an institutional entity that was effectively going to disappear.

The Marrakech Agreement establishing the WTO charges the organization with providing the common institutional framework for the conduct of trade relations among its members in matters for which agreements and associated legal obligations apply (Article II).

Three subsidiary councils operate under the general guidance of the General Council (Figure 2.1): the Council for Trade in Goods; the Council for Trade in Services; and the Council for Trade-Related Aspects of Intellectual Property Rights.

The main actors in day-to-day activities are officials that are affiliated with the delegations of members. The WTO-as was the GATT 1947-therefore can be regarded as a network organization (Blackhurst, 1998). The WTO Secretariat is the hub of a very large and dispersed network comprising official representatives of members based in Geneva and their colleagues located in capitals.

The secretariat's role is to provide members with technical and logistical support, including organizing meetings of governing bodies and preparing background documentation when requested by committees or the Council. It has very little formal power to take initiatives. For example, the

Director-General has no authority to initiate dispute settlement proceedings against a member, no matter how blatantly it may have violated WTO rules.

The secretariat plays an important role in reducing transaction costs by distributing information and enhancing transparency by undertaking periodic reviews of member trade policies. The latter is one of the few areas where the secretariat has been given a mandate to undertake action on its own responsibility.

The Director-General, the head of the WTO Secretariat, is in some sense the guardian of the collective interest of the member states. The WTO's rules and procedures allow the Director-General to act as a broker in many situations.

In 2008, the nine largest trading nations contributed close to two-thirds of the total administrative budget.

This makes the EU by far the largest contributor to the budget, accounting for over 40 per cent of the total. The WTO Appellate Body has a budget that is independent of the WTO's.

In addition to regular budget contributions, WTO members provide additional grants for specific purposes such as technical assistance or training of officials from developing countries.

Decision-making by consensus is a useful device to ensure that only decisions on which there is no major opposition-and consequently that have good chances of being implemented-are made. This is important because the WTO has few means of forcing unwilling governments to implement decisions.

Consensus in GATT/WTO practice does not imply unanimity. Instead it signifies that no delegation

participating in a General Council or ministerial conference has a fundamental object...

Achieving consensus among 150+ countries is clearly not a simple matter. World Trade Organization members have developed various mechanisms to limit the number of countries in specific deliberations. The first and most important device is to initially involve only `principals'

Another mechanism is coalition formation. A group of influential emerging economies, including Argentina, Brazil, Mexico, Egypt, India, South Africa, the ASEAN members and more recently China, actively participate in WTO fora. Many of these countries coalesced in the G2o, a coalition that had great influence in the Doha Round. A third mechanism is to appoint chairpersons